e&y - eurozone forecast summer 2013 - july 2013

June 2013Ernst & Young Eurozone ForecastEurozone

Welcom

e

Published in collaboration with

1Ernst & Young Eurozone Forecast June 2013

3 Highlights

4 Implications for businesses: adaptation required to deal with delayed Eurozone recovery

8 Policy environment becoming more supportive of growth

18 Forecast for Eurozone countries

38 Detailed tables and charts

There is little point in denying that these are still testing times for Europe. Recession and rising unemployment continue to blight the Eurozone, with their shadows extending across borders and scarring countries large and small.

This latest Ernst & Young Eurozone Forecast considers the options for policy-makers and business leaders but, sadly, we fi nd few glimmers of hope for the immediate future.

It wasn’t supposed to be like this. When the credit markets fi rst started to contract in 2007, few could have foreseen the extraordinary period that continues to play out. Since then, growth has evaporated, unemployment has surged and recession has returned to haunt Europe’s economies once more. But there is no point in looking back. Instead, the reality of Europe, some six years on from the start of the crisis, must be faced.

The fi rst step is to accept that there is no sign of imminent improvement. The GDP contraction of 0.2% in January to March this year meant that the recession in the Eurozone has now lasted for six quarters. Few countries are escaping. France, for example, is once again in recession after its economy shrank by 0.2% in the fi rst quarter of the year. Germany too is struggling, with its growth in the same quarter at just 0.1%. We now think that

the Eurozone recession will last longer than previously projected. GDP in 2013 is forecast to fall 0.6%, a slightly larger decline than in 2012. A very slow recovery should then begin, with GDP growing just under 1% in 2014 and around 1.5% a year in 2015–17.

Unemployment, meanwhile, continues its relentless rise. Having hit a record high of 12.2% in April, a total of 19.4 million people are now out of work in the Eurozone. Think about that for a moment. It’s not just a number, and “unemployment” is not just word. More than 19 million households across the region are currently coping not only with vastly reduced earnings, but also the pain and misery that unemployment leaves in its wake. Europe’s core asset — its workforce — is left to decline, which is also a great threat for business and governments to consider in terms of political and social stability.

We now expect unemployment to peak in the fi rst quarter of 2014, but at 12.7% rather than 12.5% — equivalent to an extra 500,000 unemployed workers. As a result, we forecast private consumption to contract again this year, by 0.8%, before growing 0.5% in 2014 and just over 1% in 2015. Such forecasts refl ect the stream of disappointing market data seen in recent weeks, not only from the Eurozone, but across the global economy. Although positive jobs numbers in the US suggest that its economy has turned a corner, the recovery remains fragile. Western governments are still hugely over-indebted and worries are beginning to proliferate over China’s slowing growth rate.

Given this bleak context, it is hardly surprising that European policy-makers are increasingly turning away from fi scal austerity toward fi scal credibility. And they are right to do so. Halving the austerity measures that are currently planned would raise Eurozone GDP by 1% by 2014.

This forecast refl ects the fact that we are on the track back to recovery and growth, but more slowly than we anticipated in our March forecast. However, in this report we also note some positives. There are strong signs that the Eurozone, and particularly the countries that have been hit hardest, will emerge stronger from the crisis, as they are implementing much-needed structural reforms to increase their competitiveness. And in this respect they are progressing faster than the core countries in the Eurozone, which need to do more to rebalance their economies.

The Eurozone Forecast aims to provide an easily accessible overview of macroeconomic development and to stimulate a discussion among policy-makers and the business community on how to foster growth. We believe that there are still exciting opportunities in the huge Eurozone market and that one way of grasping these is to stay abreast of developments. I encourage you to follow these developments on our dedicated website, ey.com/eurozone, and through our comments on Twitter.

Mark Otty Area Managing Partner, Europe, Middle East, India and Africa

Contents

2 Ernst & Young Eurozone Forecast June 2013

Highlights

The recession will last longer than previously projected …

• Eurozone GDP is forecast to fall 0.6% in 2013, a slightly larger decline than in 2012.

• The recovery should begin in 2014, with GDP growing just under 1%.

• Unemployment will peak at around 20.5 million in early 2014, equal to 12.7% of the workforce.

… as global conditions are unhelpful

• Softer activity in some emerging markets is holding back growth, particularly in the most trade-dependent Eurozone economies.

• The sharp fall in the yen is hampering European export prospects by intensifying competition from Japan.

But monetary and fi scal policies are being relaxed …

• The European Central Bank cut interest rates in May, but is now thought less likely to implement measures to encourage loans to small and medium-sized businesses.

• There are clear signs that the European Commission has relaxed its stance on fi scal policy, shifting from fi scal austerity to fi scal credibility.

• Halving the austerity measures currently planned would raise Eurozone GDP by nearly 1% by 2014, with Greece and Spain benefi ting most.

… and reforms will help peripheral countries

• Some peripheral countries have already made signifi cant progress as extreme fi nancing constraints have forced much-needed reforms, in areas such as labor market regulation and social welfare.

• Core countries have made less progress. They still need to boost competition in non-tradable sectors in order to help intra-Eurozone rebalancing.

Ernst & Young Eurozone Forecast June 2013 3


Implications for businesses: adaptation required to deal with delayed Eurozone recovery

As slower growth in China, Brazil and some other emerging markets is undermining global demand, and rising unemployment is constraining domestic consumption, businesses will have to adapt to the fact that recovery in the Eurozone is taking longer than anticipated. Yet, as the 17-nation Eurozone enters what may be its seventh quarter of economic contraction, fi nancial markets are signaling a pickup amid a more benign outlook. Business leaders now need to weigh up the Eurozone trends, sift for growth opportunities and refi ne strategies to meet a gradual rise in economic activity during 2014.

Securing the upside

It is important for business leaders to follow the two contrasting sets of forces that are at work. On the upside, we believe that the policy environment within the Eurozone has become substantially more supportive as the tone has shifted from fi scal austerity to fi scal reality. This is refl ected both in the policies of the European Central Bank (ECB) and an acceptance of a slowing in the pace of the austerity planned by some European Union (EU) member states.

Better credit conditions are on the way. May’s quarter-point cut in the ECB refi nancing rate, to 0.5%, refl ected both poorer growth prospects within the Eurozone and the ECB’s determination to do something about it. The Bank urged governments to maintain progress on fi scal defi cit reduction, but simultaneously stressed that reviving lending to small and medium-sized enterprises (SMEs) is a key objective. The ECB is aware that lending cheaper money to banks does not necessarily help SMEs in peripheral states, and is exploring ways to revive the market in securities backed by bank loans to small businesses. This would free banks to make more loans to the business sectors that fi nd it hardest to access fi nance. Although an early move to lift credit to SMEs seems unlikely, making it easier for them to access fi nance would have a positive effect on Eurozone recovery. We calculate that if half the credit tightening that has happened since 2008 were reversed within two years, Eurozone GDP would increase by €65b, or 0.7%, and unemployment would be almost 500,000 lower by 2017.

The second upside for business stems from the growing recognition that markets and business alike need fi scal credibility rather than fi scal severity. Less austerity would help a return to economic growth. We estimate that halving the austerity measures currently planned would raise Eurozone GDP by almost 1% by 2014, with some of the southern peripheral economies benefi ting most.

Feeling the global brakes

But our belief that recovery will be delayed arises partly from developments outside the Eurozone. Vital exports to emerging markets are likely to prove softer than previously envisaged. Cooling is especially marked in China and Brazil. This will weaken demand for Eurozone exports, which have hitherto remained a bright spot for economies such as Germany, and even Spain.

Meanwhile, business will have to consider the introduction of the growth-oriented policies initiated by Japan, which have precipitated a 40% fall in the value of the yen and are thus likely to rekindle Japanese business. Europe’s exporters of products ranging from capital goods to automobiles and medicines will probably fi nd that they face much more intense competition from Japanese rivals in both emerging markets and developed economies.

In recent years, China and Japan have emerged as top markets for luxury goods from the Eurozone. The slowdown in growth in China and depreciation of the yen could weaken demand for top-end French and Italian consumer products — though the US economic uptick might help to compensate.


Reading the markets

As they assess how best to respond to economic trends, business leaders inevitably turn to the markets for guidance. Today, the signals from the capital markets are far from unanimous: some are fl ashing green, while others show amber or linger on red.

Equity markets have risen strongly around the word for two principal reasons. Although this September’s German parliamentary elections could have repercussions across the Eurozone, there is a broad belief that many of the major global political and economic uncertainties have been resolved. And against a backdrop of very low interest rates and quantitative easing in some developed economies, investors see equity markets as offering the best returns, especially compared with very low yields on sovereign bonds.

The extent to which equity markets refl ect future prospects is debatable. Nominal peaks in equity indices are not as rosy in real terms. Yet some sharp and sudden corrections in late May, notably in Japan, could signal that markets have run ahead of events and need to stabilize. But they are reasonably well underpinned. Given the state of the economy, corporate profi ts have generally met or exceeded expectations. Companies have overachieved against low targets.

Investors are searching for yield. This creates opportunities for businesses to obtain affordable funding. Many companies are taking advantage and going to the market. Indeed, with investors hungry for returns, even markets in junk bonds have revived.

Many European companies have traditionally relied more heavily on bank borrowing than their US counterparts. With banks’ capacity to lend limited by the need to rebuild their balance sheets, European corporates are tapping investors to renew their borrowings. By early May, European high-yield corporate issuance in 2013 had exceeded US$57b, almost twice the amount during the same period in 2012, and almost three times the US$19b issued in 2006. Issuers included companies from Greece, Italy and Portugal, and average yields fell below 5.5%.

As ECB President Mario Draghi and his colleagues examine how best to increase funding for SMEs, they will probably take a close look at the Bank of England’s Funding for Lending Scheme. Today, smaller companies in peripheral Eurozone countries have to pay substantially higher borrowing rates than those in Germany and France.

Adapting to weak demand

With a total population of 740 million, Europe is a vast market — too big for international fi rms to ignore. More than 500 million well-educated and prosperous consumers within the EU alone are estimated to account for around 20% of world GDP.

But with demand growing much faster in emerging markets and the US, many non-European investors remain wary of adding capacity within the Eurozone. The blight on demand arises from the continuing increase in EU unemployment, which in turn undermines consumer demand. As consumers tighten their belts, they focus their spending on housing, utilities and food, dispensing with luxuries and seeking more cost-effective solutions to their needs.

Both manufacturing and services companies selling to these cash-strapped consumers need to brace themselves for continuing pressure on their profi t margins and deferred recovery. Thus, competition seems likely to intensify further.

Adapting to structural reform

A loosening of the straitjacket of austerity spells hope for companies serving public markets, from pharmaceuticals to education supplies. But the trade-off sought by policy-makers for longer-lasting defi cits may well prove to be accelerated market reform. More fl exible labor markets could help companies to increase productivity, reduce costs and even relocate. But other reforms are designed to end historic privileges and protections enjoyed in some fi elds, such as professional services. The lesson from Germany’s Agenda 2010 reform program, launched in 2003, is that they can take half a decade to deliver.


Yet simultaneously, many Eurozone governments are aiming to facilitate entrepreneurship. In Spain, where starting a business has historically been slow and cumbersome, a new law aims for a “one-stop shop” where entrepreneurs can create a company within 24 hours. Gradually, as it is made easier for innovators to bring their ideas to market more quickly and effi ciently, companies will fi nd more new suppliers clamoring to offer novel solutions to their needs.

Sustaining capacity, securing talent

We continue to believe that the Eurozone is partway through a “lost decade”. The delayed recovery creates challenges for companies and policy-makers alike. One critical challenge centers upon education and training. As unemployment surges, companies need to collaborate with employment agencies, educational institutions and training bodies to ensure that workers with appropriate skills will be available when demand recovers. Enterprises can take an “option” on skilled college leavers by expanding their internship programs to create a low-cost internal pipeline of young talent.

Another strategy being pursued by some vanguard companies is to step up recruitment in peripheral countries, such as Greece and Spain, where even highly qualifi ed workers may be struggling to fi nd jobs. Surging demand for German language classes in some peripherals refl ects willingness among job-seekers to seize the opportunity of greater labor mobility. Meanwhile, the German Government has made it easier for fi rms to hire foreigners whose skills are in short supply.

As they await the tipping point, when demand from emerging economies and Eurozone consumers at last drives a sustained recovery, company directors have one overriding duty to themselves and their stakeholders: to ensure that their business is in the best possible shape to profi t from the upturn when it fi nally comes.

Attracting foreign direct investment

Box 1

Ernst & Young’s attractiveness survey: Europe 2013 reveals that a solid 3,797 foreign direct investment (FDI) projects were announced in Europe during 2012, creating over 170,000 jobs. The UK and Germany emerge as the top destinations for FDI. But it is signifi cant that Spain, Belgium, Ireland and Finland have been able to attract substantially more projects than in previous years.

Despite the ongoing debt crisis, 37% of the global business leaders interviewed for the survey ranked Western Europe as the world’s second most attractive FDI destination. One key explanation for the interest in Europe as a location is that investors have learned to master the crisis and fi nd opportunities in the ongoing reconstruction, benefi ting from the availability of cheap assets and declining labor costs.1

Learn more at: ey.com/attractiveness

1 Ernst & Young’s attractiveness survey: Europe 2013: Coping with the crisis, the European way, measures the reality of FDI in terms of projects initiated and jobs created and is based both on Ernst & Young’s European Investment Monitor database and a survey of 808 international decision-makers.


Key questions for businesses

Box 2

• Follow domestic developments. What opportunities will tax changes, looser fi scal policy and better credit conditions mean for business?

• Keep an eye on the global market. What impact will the slowdown in growth in China and the depreciation of the yen have?

• Find new sources of funding. European companies depend more on bank borrowing than their US counterparts. What opportunities does this bring for investors?

• Adapting to weak Eurozone demand. The surge in unemployment undermines consumer demand. What is the effect of reduced demand and increased competitiveness? Will new markets and segments offer new opportunities?

• Spot opportunities created by structural reforms. Could labor market reforms bring new business opportunities? Is it time to relocate?

• Make sure your business is prepared for the upturn. Form a strategy to ensure that you have the appropriate skills to thrive when demand recovers. Could co-operation with employment agencies and educational institutions be a way forward? Have you considered introducing or expanding an internship program?

Implications for businesses: adaptation required to deal with delayed Eurozone recovery

8 Ernst & Young Eurozone Forecast June 2013Ernst & Young Eurozone Forecast Summer edition June 20118

Policy environment becoming more supportive of growth



Recovery is taking longer to materialize than expected ...

Although to date this recession has not been deep, particularly when compared with the recession of 2008–09, it is proving to be protracted. Indeed, at six quarters, this recession is the longest in the Eurozone’s history. We now expect it to last longer than previously projected, due to a weaker international backdrop (particularly in emerging markets) limiting exports and a weaker labor market holding back consumer spending as austerity continues to bite. GDP in 2013 is forecast to fall 0.6%, a slightly larger decline than in 2012. The steep depreciation of the yen is also limiting European export prospects by increasing competition from Japan.

Figure 1GDP growth

% quarter

% year-on-year(left-hand side)

% quarter-on-quarter(right-hand side)

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast

% year

Source: Oxford Economics.

... and the international environment is taking time to improve

Although the forecast for growth in the developed economies in 2013 is little changed from our March 2013 report, our growth forecast for emerging markets has been cut from 5.4% to 5%. Notable downward revisions to individual countries include a 0.7 percentage point cut to our Chinese growth forecast (to 7.5%) and a 0.4 percentage point cut to our Brazilian growth forecast (to 2.7%).

China’s growth slowed more than we had been expecting in Q1 2013, and the authorities have indicated their willingness to accept slower growth now as a trade-off for more balanced expansion in future. Recent data suggests that domestic consumption will not support the growth that we had been expecting, despite a relatively loose monetary policy stance and expanding credit. We have therefore cut our outlook for both the short and medium term. This means that Chinese import demand will be weaker than we had previously forecast, with wider ramifi cations for world trade and therefore growth elsewhere, particularly in the country’s main trading partners — including the Eurozone.

Table 1Forecast of the Eurozone economy (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -0.5 -0.6 0.9 1.4 1.5 1.6

Private consumption -1.3 -0.8 0.5 1.1 1.3 1.5

Fixed investment -3.9 -2.4 2.0 2.9 2.7 2.6

Stockbuilding (% of GDP) 0.0 -0.2 -0.2 -0.1 0.0 0.0

Government consumption -0.3 -0.4 -0.3 0.3 0.6 0.8

Exports of goods and services 2.9 1.0 3.4 4.2 4.1 3.9

Imports of goods and services -0.8 -0.1 3.0 4.4 4.4 3.9

Consumer prices 2.5 1.6 1.5 1.4 1.4 1.4

Unemployment rate (level) 11.4 12.4 12.7 12.4 12.0 11.6

Current account balance (% of GDP) 1.3 1.7 1.5 1.4 1.3 1.3

Government budget (% of GDP) -3.7 -2.8 -2.4 -1.9 -1.5 -1.2

Government debt (% of GDP) 92.7 95.8 97.5 98.4 98.5 98.1

ECB main refi nancing rate (%) 0.9 0.6 0.5 0.5 0.5 0.7

Euro effective exchange rate (1995 = 100)* 115.5 118.5 115.6 112.0 111.1 110.9

Exchange rate ($ per €) 1.28 1.29 1.21 1.17 1.17 1.17

* A rise in the effective exchange rate index corresponds to an appreciation of the euro


Figure 2BRICs: Manufacturing Purchasing Managers’ Index

Index, breakeven level = 50

30

35

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011 2012 2013

China Brazil

Russia

India

Source: PMI; Markit; China NBS; Haver Analytics.

The pace of Eurozone export growth is being held back by demand that is weaker than expected. In addition, the depreciation of the yen against the euro means that European exporters will face tougher competition from Japanese companies. The yen has fallen by 40% against the euro since late July 2012, with the most recent decline coming in response to a marked expansion of the Bank of Japan’s quantitative easing program.

Labor market weakness is hitting the domestic economy

In addition to a weaker global environment, Eurozone unemployment has risen more than we had expected as austerity has continued to bite. The rise in unemployment refl ects both the continued weakness in the external environment and the fact that austerity has been far more damaging to the economy than many early estimates suggested. Nevertheless, we still expect unemployment to peak in the fi rst quarter of 2014, but at 12.7% rather than 12.5%, which equates to an extra

500,000 more unemployed workers. The weakness of the labor market will curtail household incomes and thus consumer spending growth over the next three years. As a result, we expect private consumption to contract again this year, shrinking by 0.8%, before growing 0.5% in 2014 and just over 1% in 2015.

Increasing risk of unemployed becoming deskilled

At over 24%, youth unemployment is particularly high in the Eurozone overall. In Greece and Spain, it has reached alarming levels, at 62% and 56% respectively. The rising number of long-term unemployed is also a concern. Almost half of the jobless total is now classed as long-term unemployed, up from a third at the start of 2009. Such high levels of youth and long-term unemployment will result in workers becoming deskilled and detached from the labor market, hindering the Eurozone’s medium-term prospects.

Conditions expected to improve in H2 2012

A very slow recovery should begin in the second half of 2013, with GDP growing just under 1% in 2014 and around 1.5% a year in 2015–17. Refl ecting an international environment that is weaker than expected and the further deterioration in the labor market, the downward revisions to our forecast are focused on exports and consumer spending. The revisions to our export forecasts are most pronounced for more trade-dependent Eurozone economies, such as Germany.

But other sectors will remain under pressure as consumers and governments continue to make cuts. Construction is again expected to perform very poorly in 2013, with a decline of 3.3% seen in the Eurozone as a whole, after a decline of over 4% in 2012. Meanwhile, manufacturing is forecast to post a second consecutive decline of around 1.6%, before starting to recover in 2014 as export demand and trade fl ows pick up. Financial and business services are expected to grow very modestly this year, before accelerating in 2014 as business confi dence starts to build.

Table 2Forecast of Eurozone by sector (Annual percentage changes in gross added value) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

Manufacturing -1.6 -1.7 1.6 2.2 2.1 1.9

Agriculture -0.9 -0.9 1.0 1.3 1.2 1.2

Construction -4.2 -3.3 0.2 1.5 1.8 1.7

Utilities 0.8 -0.4 2.1 1.9 1.8 1.7

Trade -0.7 -1.1 0.6 1.2 1.4 1.5

Financial and business services 0.7 0.1 1.4 1.7 1.7 1.8

Communications 0.6 0.8 2.5 2.7 2.8 2.8

Non-market services 0.2 -0.5 -0.2 0.4 0.6 0.9



Infl ation outlook is very benign

With the economy expected to contract for a second year running and spare capacity standing at 4% of GDP, we expect Eurozone infl ation to fall from 2.5% in 2012 to 1.6% in 2013, and then stay close to 1.5% until 2018. And were it not for an anticipated 7% fall in the trade-weighted value of the euro by the end of 2016, the outlook for infl ation would be weaker still. The forecast fall in the euro refl ects the comparative weakness of a “lost decade” for the Eurozone economy, but it will also put upward pressure on import prices.

Interest rate cuts increase odds of recovery

In May, the ECB cut its policy interest rate from 0.75% to an historic low of 0.5%. Interest rates have now fallen by one percentage point since this easing cycle began in the fi nal quarter of 2011, when the Eurozone was slipping back into recession.

This latest cut in rates has been driven by three main factors. First, there has been weakness in both the Eurozone and global activity. Eurozone activity data has been coming in below market expectations since March 2013. There have also been negative surprises outside the Eurozone, with data for the major developed economies as a whole, and for emerging markets, weaker than expected. Second, with Eurozone infl ation so low, there is a clear risk of defl ation, which the ECB is likely to wish to avert. Third, and perhaps most worrying, there are clear signs that credit conditions remain tight in the peripheral Eurozone countries.

Figure 3ECB refi nancing rate

% year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast


Further steps will be necessary to ensure recovery

Given that corporate borrowing rates remain high in the periphery, we expect the ECB to take further steps to ease the policy environment. These are likely to be aimed at addressing the broken monetary policy transmission mechanism in the periphery, which has its origins in the fragmentation of the European banking system and fi nancial markets. At present, low interest rates are not being passed through to the real economies in the periphery, where stimulus is most needed. Over the last year, the ECB has successfully reduced intra-Eurozone sovereign spreads. But it has been far less successful at reducing cross-country divergence in banks’ lending rates to companies, which have remained stubbornly high, despite the stabilization of sovereign markets.

Figure 4Weighted average peripheral bond spread

% spread over German bunds

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jul-10 Jun-11Dec-10 Dec-11 Jun-12 Dec-12

Source: Oxford Economics; Reuters.

There was a clear break in 2011, when interest rates charged to businesses in peripheral countries started to diverge from rates in the core countries. Before then, companies in the periphery and the core paid similar rates of interest on bank loans. Now, Spanish and Italian companies pay over 5.5% to borrow money, but their German and French counterparts pay only around 3.5%. This fragmentation of the banking system should be the ECB’s next focus.


Figure 5Ten-year bond yields

%

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2005 2006 2007 2008 2009 2010 2011 2012 2013

Germany France Italy Spain

Source: Haver Analytics.

Further rate cuts could prove counterproductive

This problem will not be fi xed by cutting interest rates again. Indeed, additional cuts in interest rates would probably mean that the deposit rate (the interest rate paid to banks for deposits with the ECB) would turn negative. This would hit banks’ profi ts and therefore be counterproductive. Moreover, it is simply not possible for the ECB to cut interest rates to the extent needed in the periphery. An estimation of the appropriate rate of interest for each Eurozone country based on domestic infl ation and spare capacity illustrates this point. While the ECB’s current rates may be appropriate for Germany, monetary policy is far too tight for the peripheral countries. Greece would need negative interest rates of somewhere between -10% and -15%, while economic conditions in Spain and Italy would justify rates around the -1% to -4% mark. Although negative policy rates are highly unlikely, our estimates illustrate the degree of monetary policy easing that would be warranted in the peripheral countries.

Measures need to be targeted at reducing corporate borrowing rates

A more effective way for the ECB to ease monetary conditions would be to create new incentives for banks to lend to businesses, particularly SMEs. For example, this could be done by easing collateral rules in its liquidity operations, which would enable banks to fund their lending to SMEs more cheaply. ECB president Mario Draghi has mentioned that discussions are under way with the European Investment Bank to help fund a European asset-backed securities market for loans to SMEs.

Although early moves on this front now appear unlikely, we still think that easier and broader-based access to fi nance for SMEs could be a signifi cant factor in securing the recovery of the Eurozone economy. At present, many small companies have to rely on retained profi ts or borrowing from banks if they wish to expand by investing in new machinery or hiring additional workers. Small companies tend not to have direct access to fi nancial markets. Consequently, weakness in bank lending hits them much harder than large enterprises. Therefore, any measure that is successful in bringing down lending rates to SMEs should boost business investment, the labor market and hence the broader economy. For instance, if half the tightening in credit conditions that has occurred since 2008 were to be reversed within two years, Eurozone GDP would be raised by 0.7% (around €65b) and unemployment would be nearly 500,000 lower by 2017.

Figure 6Unemployment

Millions

11

12

13

14

15

16

17

18

19

20

21

2005 2007 2009 2011 2013 2015 2017

Forecast

Easing of credit conditions scenario

Baseline


Support also needs to come from fi scal policy

As well as action from the ECB to ease credit conditions in the periphery, we also expect some easing in the pace of fi scal tightening. There is a growing recognition by policy-makers that what is needed to keep a lid on bond market borrowing costs is a credible fi scal plan rather than fi scal severity at any cost, which can kill growth and hence increase the likelihood of countries encountering debt problems. The European Commission (EC) signaled a clear shift in stance at the end of May, when it gave seven member states more time to meet their budget defi cit targets.



France, Spain, Poland and Slovenia have been given an extra two years to bring their defi cits below the 3% of GDP under the Stability and Growth Pact. Meanwhile, Belgium, Portugal and the Netherlands have been given an extra year. This easing of targets removes the need for deeper spending cuts and revenue-raising measures, such as further increases in value-added tax (VAT), steps that would otherwise have harmed growth in the near term.

In addition, the new Italian Prime Minister has cancelled the fi rst payment, due in June, of an unpopular property tax imposed by the previous government. There is also political pressure to cancel the next housing tax installment, due in December. Italy has ruled out a planned VAT increase in July and has promised to cut employers’ welfare contributions, give tax breaks for energy-saving house improvements, expand a guarantee fund for SMEs and improve welfare benefi ts. Depending on how much of this actually happens, it would result in a revenue shortfall of some €10b–€20b. Yet the new Government has promised that Italy will respect its commitments to its Eurozone partners, including getting the budget defi cit below 3% of GDP. The lower tax revenue is likely to be offset by reductions in current spending — there is much fat to trim, starting with one of the three existing layers of local government.

Easing austerity would be most benefi cial for Spain and Greece

On current plans, discretionary cuts of 1.1% of GDP are still due to be implemented across the Eurozone in 2013, with cuts of 4.2% in Spain and 2.9% in Greece. However, given the postponement of fi scal targets in France, Spain and Italy, it is now possible to envisage a scenario in which the Eurozone moves toward abandoning austerity. Were this to happen, growth would exceed our expectations.

Figure 7Discretionary fi scal tightening, 2013

% of GDP, total 2012–13

0.0 1.0 2.0 3.0 4.0 5.0-1.0

Germany

Portugal

Ireland

Italy

Eurozone

France

Netherlands

Greece

Spain

Source: Oxford Economics; Haver Analytics.

Simulations using Oxford Economics’ Global Economic Model suggest that halving the currently planned austerity measures would raise the level of Eurozone GDP relative to our baseline forecast by 0.2% in 2013 and by a further 0.7% in 2014. This would take effect mainly through increased household consumption in response to a stronger labor market, as fewer public sector jobs are shed, and expanding private sector investment in response to improved business confi dence. The most marked effects would be seen in Greece and Spain, where GDP would be, respectively, 0.5% and 2.3% higher in 2013 and 0.8% and 2.5% higher in 2014. However, the impact on France and Italy would also be substantial. Eurozone unemployment in 2014 would be reduced by 300,000.

But any letup in current policies would face substantial opposition from Germany and some other core Eurozone countries. This does not mean that it cannot happen, however. Some countries — notably France, Italy and Spain, which are not bound by any bailout terms and make up half of Eurozone GDP — can implement partial easing on their own, as long as their plans are approved by the EC. But a further easing of fi scal policy, notably involving fi scal stimulus in Germany, will have to wait until after the German elections in September.

Further fi scal stimulus, beyond that included in our simulation, could be provided if Germany increased public sector spending, which it has room to do. Easier fi scal policy would be the single most effective measure to foster growth in Germany and the Eurozone, but so far, this option has been rejected by the German Government.

Figure 8GDP under alternative scenarios

€b

2,000

2,025

2,050

2,075

2,100

2,125

2,150

2,175

2,200

2,225

2,250

2005 2007 2009 2011 2013 2015 2017

Forecast

Baseline

Easing of austerity scenario



Eurozone manufacturing winners in the current environment

Box 3

The manufacturing sectors that will perform best in the current environment are those in which the Eurozone has clear technological and quality advantages over lower-cost competitors. These include aerospace, electronics, machinery, and medical and surgical equipment.

Aerospace industry will benefi t from global passenger growth

The European aerospace industry’s prospects remain positive, with the International Air Transport Association raising its forecast in December for global airline profi ts — to US$6.7b in 2012 and US$8.4b for this year — and passenger growth continuing. The main long-term driver of expansion in passenger numbers is the increasing wealth of the middle classes in emerging markets. So, while globalization is resulting in more long-haul business travel, growing prosperity in emerging markets is raising demand for short-haul aircraft. Although the order cycle has probably peaked for civilian aircraft, backlogs remain substantial. Meanwhile, lower macroeconomic risks cement the prospects for airlines taking deliveries on schedule. Airlines in turn are keen for the delivery of new planes to help raise the fuel effi ciency of their fl eets.

Figure 10Leading manufacturing sectors

2000 = 100

Forecast

60

80

100

120

140

160

180

200

220

240

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Electronic engineering

Medical and surgical equipment

Mechanical engineering

Aerospace


Economies could emerge stronger from the crisis

The Eurozone debt crisis and the continuing recession are acting as a catalyst for structural reforms that might not have otherwise taken place. Policy-makers are increasingly aware of the need to accompany macroeconomic stabilization policies with long-needed structural reforms. Consequently, the Eurozone could eventually emerge stronger from the crisis.

The pace of reforms has been particularly fast in the Eurozone countries that are under fi nancial assistance programs or direct market pressures — Greece, Ireland, Italy, Portugal and Spain — even in politically sensitive areas such as labor regulation and welfare. In these countries, there has been a correlation between the pace of reform and increases in government bond yields during 2011 and 2012. This contrasts with the much more moderate pace of reforms in other Eurozone countries, in particular countries with current account surpluses such as Germany, Luxembourg and the Netherlands. Reforms, including measures to boost competitiveness in non-tradable sectors, are also needed in these countries to assist with intra-Eurozone rebalancing.

Figure 9Responsiveness to structural reforms recommended by the OECD

1 = progress in all areas where recommendations made

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Luxe

mbo

urg

Net

herla

nds

Bel

gium

Slov

enia

Ger

man

y

Fran

ce

Euro

zone

Aus

tria

Slov

akia

Italy

Spai

n

Port

ugal

Esto

nia

Irel

and

Gre

ece

Source: Oxford Economics; OECD.

Labor market reform is particularly intense in the periphery

The intensity of reform has been particularly high in the areas of wage bargaining and employment legislation, as countries have sought to boost job creation, facilitate the reallocation of resources toward growing sectors and reduce labor market duality (the existence of separate segments where comparable workers enjoy differential wage conditions and job protection). For example, Portugal and Spain have raised the responsiveness of wage adjustments to labor market conditions by allowing fi rms in weak markets to deviate from collective bargaining agreements. Reforms in the important area of job protection



Despite fewer new orders than Boeing booked last year, the €550b Airbus order book underpins European production prospects, and it seems that deliveries are fi nally being ramped up. Output prospects for Germany, Italy and the UK are all now felt to be signifi cantly better than at the start of the year. EU output growth is now expected to be over 8.5% (with both the UK and Germany posting double-digit gains). The positive impact should be felt across the Eurozone, given that Airbus’s supply chain reaches across the continent.

Although demand for civilian aircraft is buoyant, the military sector continues to suffer from pressured defense budgets. In the US, the sequester will cut US defense spending by US$46b this fi scal year. As the cuts are indiscriminate and across-the-board, all programs are likely to be affected, which is particularly damaging to multi-year capital projects. As a result, the drag from lower military orders is set to intensify. Nor is this drag limited to the US. Defense budgets across the globe are under pressure and competition for the orders that are being placed is intense. As such, the profi tability of any new orders is likely to be limited, with sector profi ts largely being generated by the civilian subsector, exposing those companies concentrated in the defense fi eld.

Electronics and machinery have a quality edge

Eurozone companies are signifi cant players in the production of electronics and machinery. The electronic engineering sector (which includes both consumer electronics as well as the sophisticated IT and measurement devices embedded in capital equipment, automobiles and a whole host of other products) is nearly twice the size of the European aerospace sector and has grown by almost 50% in the past decade. Robust protection of intellectual property is one key issue that makes Europe an attractive manufacturing center relative to emerging markets. This competitive advantage is reinforced by the importance of product quality standards that few emerging market competitors can meet, and the fact that labor is a relatively small share of overall production cost, so relative wage rates are a less important factor in the value proposition. These factors will allow sector output to increase by another 40% in the next 10 years, despite the continued migration of consumer electronic production to Southeast Asia.

A similar dynamic is at play in industrial machinery, particularly the highly engineered components that feed into mission-critical production applications. In some cases, these goods are also very costly to transport, so proximity to the European market can be an advantage. Germany has long been a global

leader in engineered products, and strong demand from the US, as well as China and other investment-intensive emerging markets, has offset weakness closer to home. Italy and Spain are also large players, though their European market focus has dampened short-term prospects. Despite this, Eurozone sector output is expected to grow by more than 25% over the next 10 years.

Medical and surgical equipment benefi ts from demographic trends

In the short term, the growth in health care spending in the Eurozone and the UK will be constrained by fi scal tightening. But aging populations and increasing wealth will be signifi cant drivers of growth in demand for medical and surgical equipment — a sector in which European companies are global leaders. This is also a sector in which quality rather than cost or time to market is a key factor in determining which supplier wins the business. As well as experiencing secular demand growth, the sector is not particularly vulnerable to competition from businesses located in countries with low labor costs, given the high quality standards demanded by customers and the low labor intensity of the sector. We expect Eurozone output growth to accelerate to more than 3% per annum by the end of the decade, well ahead of the manufacturing sector as a whole, with France and Spain being the leaders.


have also been implemented over the last two years in European countries that need to regain competitiveness and where labor duality is high, particularly Italy, Portugal and Spain. Although notable progress has been made, the legislative changes implemented have often been less ambitious than initial announcements, refl ecting their unpopularity and the associated public and political opposition.

Resources are being moved away from less effi cient sectors

The need to put public fi nances on a sustainable path and regain competitiveness has been a major driver of reforms in Greece, Ireland, Italy and Portugal. This is designed to encourage the reallocation of resources away from ineffi cient sectors toward more effi cient ones, with the aim of boosting productivity and potential growth rates.

Competition is being strengthened

Steps have been taken to encourage competition in product markets. To this end, barriers to entry are being removed in retailing, professional services, energy markets and public utilities. Regulation is being made more transparent and competition frameworks are being strengthened. Steps are also being taken to both improve the cost-effi ciency of the public sector and reduce its size, which should also boost productivity.

Tax systems are being made more effective

Tax policies and pension systems are also being reformed as part of the process of putting public fi nances on a sustainable footing. Governments have increased the effi ciency of tax collection and are widening the tax base, with notable progress made in Greece, Italy and Portugal. At the same time, steps are being taken to make the tax system more growth friendly, with some of the tax burden shifted from labor to consumption, immovable property and environmental taxation. Pension reforms that were already under way at the onset of the crisis have been accelerated as a result of the pressures to achieve debt sustainability. Retirement ages have been raised and contribution periods required for a full pension have increased, including in France and Spain.

More needs to be done to safeguard the fi nancial system

As a result of the crisis, signifi cant steps are being taken to make the fi nancial system safer, not least with the increasing integration of supervision proposed by the EU’s Economic and Financial Affairs Council. However, further reforms to improve the stability and integration of the system are needed. These might include, for example, ensuring robust regulatory requirements and adopting a consistent set of rules, common supervisory practices, and an EU-wide deposit insurance scheme, while also establishing a bank resolution mechanism based on common fi nancing.

Conclusions

We now expect the recession in the Eurozone to last longer than previously forecast. The central causes of this are the negative impact of a weaker international environment on exports and higher unemployment weighing on domestic demand. GDP in 2013 is forecast to fall 0.6%, a slightly larger decline than in 2012. A very slow recovery should then begin, with GDP growing just under 1% in 2014 and around 1.5% a year in 2015–17. We expect the ECB to implement measures to encourage loans to SMEs. While new measures may take time to have an impact, we think that easier and broader-based access to fi nance could be a signifi cant factor in securing a recovery. The authorities also now seem ready to slow the pace of fi scal consolidation.

However, it is important that easing austerity does not distract from politically diffi cult supply-side reforms. So far, the weak economy has encouraged national governments and the EU to push through much-needed structural reforms. Because of this, it is increasingly likely that some Eurozone countries will emerge stronger from the crisis. Those receiving fi nancial assistance or facing market pressures have already made signifi cant progress and extreme fi nancing constraints have forced essential reforms in politically sensitive areas. However, the core countries have made less progress and they should still focus on intra-Eurozone rebalancing by increasing competition in non-tradable sectors.



Forecast assumptions: international environment and commodity prices Box 4

Our forecast for the Eurozone depends on a number of assumptions about the international environment, world GDP, and trade and commodity prices.

With the main economies in the industrialized world struggling, and the leading emerging markets also experiencing some problems, world GDP growth in 2012 slowed to 2.3% from almost 3% in 2011. The main problems emanated from Europe, where fears of a Eurozone breakup, continuing austerity by governments to bring down fi scal defi cits and debt, and sharply higher unemployment weighed heavily on activity. This slowdown partly offset a slight pickup in growth in the US to 2.2%.

Although concerns about a breakup of the Eurozone have receded, and prospects for the other major industrialized economies now appear to be improving slowly, the outlook for the leading emerging markets has worsened since the start of 2013. This has weighed on investment orders in the major economies and on world trade in the opening months of 2013. As a result, the Eurozone is now expected to contract by 0.6% in 2013, US growth of just 2%

is envisaged and Japan is forecast to expand by just under 1% — all weaker than in 2012.

And the recent signs from China have been disappointing. Amid weaker export demand, we have cut our growth forecast for China to 7.5% for 2013 and 8% for 2014, which will have a signifi cant impact on other emerging markets in Asia and on world trade and growth. We have also cut our medium-term forecast for China, based on the Government’s reassessment of the pace of growth consistent with a rebalancing of the economy away from investment.

Most other emerging markets are also growing more slowly in 2013, with Brazilian growth now forecast at just 2.7%. Growth in India is expected to pick up to 5.2% this year, a little better than in 2012. But this will still be signifi cantly below our March projection of about 6%. As a result, our forecast is for world GDP to grow by a lackluster 2.1% in 2013, a little below our forecast of three months ago, and then to pick up gradually to 3%–3.5% a year in 2014–17. This modest growth profi le will be refl ected in world trade, now forecast to rise by just 3% this year, only a little better than the 2.3% increase in 2012.

Despite continuing uncertainty about political developments in the Middle East and fears about the regional fallout from the civil war in Syria, Brent crude oil prices have fallen to just over US$100 per barrel in recent months. Reduced output in sanctions-hit Iran has been offset partly by rising output in Iraq and some other states of the Organization of the Petroleum Exporting Countries (OPEC). Our forecast is for Brent crude to average US$105 per barrel in 2013, below our estimate for the March forecast and down by about 6% from the 2012 average. For 2014, we forecast a small rise to about US$108 per barrel, with a further pickup to around US$115 seen in 2015–16 as stronger world demand offsets downward pressure from higher output in a number of important producers.

Figure 11World: GDP growth

% year

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-4

-3

-2

-1

0

1

2

3

4

5

6 Forecast


Figure 12Oil price, nominal

US$ per barrel

0

20

40

60

80

100

120

140

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Forecast



Forecast for Eurozone countries


AustriaBelgiumCyprusEstoniaFinlandFranceGermanyGreeceIrelandItalyLuxembourgMaltaNetherlandsPortugalSlovakiaSloveniaSpain


17 Eurozone countries

To fi nd out more, please visit www.ey.com/eurozone

Please visit our Eurozone website for access to additional information on the Ernst & Young Eurozone Forecast, the 17 individual country forecasts and supplementary perspectives and interview content. The site contains the latest reports as well as an archive of previous releases.

Download our new EY Forecasts in focus app, which allows you to create graphs and tables for the geographies most relevant to you. The app also makes it easy to share content and learn more about our other forecasts.

Spain

Portugal

France

Ireland

Finland

Estonia

Netherlands

Belgium

Luxembourg

Slovakia

Austria

Slovenia

Italy

Greece

Malta

Cyprus

Germany


• � Despite growth stagnating in Q1 2013, conditions for a domestically driven recovery remain intact. Business investment is supported by favorable fi nancing conditions and strong corporate cash reserves, while consumers will benefi t from falling infl ation improving their purchasing power.

• � But persistent uncertainty regarding the general economic outlook continues to weigh on investment and consumption decisions, while exports are dampened by weaker external demand. As a result, we continue to forecast GDP growth of under 1% this year, before it accelerates in 2014 as uncertainty recedes and the external environment improves.

• � The fi scal defi cit for 2012 was lower than expected, owing mainly to strong adjustment by Austria’s regional governments. Due to weak revenue growth, further major improvement is likely to be delayed until 2014 and thereafter. We expect the budget defi cit to narrow to 0.9% of GDP in 2016, above the offi cial target, but representing no threat to fi scal sustainability.

Austria

Table 3Austria (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 0.8 0.7 1.8 1.5 1.6 1.5

Private consumption 0.4 0.4 1.3 1.5 1.6 1.5

Fixed investment 1.8 1.2 2.8 2.4 2.1 2.1

Stockbuilding (% of GDP) 1.8 1.6 1.0 0.6 0.6 0.7

Government consumption 0.4 0.5 1.6 1.8 1.8 1.8


Imports of goods and services 1.2 1.4 4.8 5.4 5.4 5.3

Consumer prices 2.6 2.2 1.8 1.8 1.8 1.8





Figure 13Contributions to GDP

% year

Forecast

GDP

Net exports

Domestic demand

-4

-3

-2

-1

0

1

2

3

4

5

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016


Figure 14Government balance and debt

% of GDP

40

45

50

55

60

65

70

75-7

-6

-5

-4

-3

-2

-1

0

11990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Forecast

Government balance(left-hand side) Government debt

(right-hand side)

% of GDP



Belgium

• Belgium is enduring a second year of mild contraction in 2013, with falling or stagnant demand across most sectors. We forecast a limited pickup from 2014, as multiple factors inhibit the recovery, and GDP growth is forecast to be constrained below 1.5% through to 2016.

• We now expect export growth of just 0.6% in 2013, picking up to 3.6% in 2014. However, as fi scal austerity and bank deleveraging hamper the recovery around Europe, Belgium’s export growth will subsequently be limited to around 4% a year.

• Firms are set to cut capital spending further in 2013, and the investment recovery will then be tempered by the slow recovery in export markets. And the Government will continue to trim spending to lower the budget defi cit.

• We expect the unemployment rate to rise above 8.5% by the end of 2013. Some support to households will be provided by easing energy prices, but consumer spending growth of just 0.3% is expected in 2013, rising to about 1% in 2014 and 2015.

Table 4Belgium (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -0.2 -0.4 0.7 1.2 1.4 1.7

Private consumption -0.6 0.3 0.8 1.1 1.2 1.3


Stockbuilding (% of GDP) 1.0 0.5 0.4 0.2 -0.2 -0.2

Government consumption 0.1 -0.1 -0.4 -0.4 0.2 0.5


Imports of goods and services -0.1 0.2 3.3 3.8 3.8 3.6

Consumer prices 2.6 1.5 2.1 2.2 2.0 2.0


Current account balance (% of GDP) -1.4 0.7 0.8 0.9 0.9 1.0



Figure 15Exports and investment, private sector business growth

% year

-4

-2

0

2

4

6

8

10

12

14

2011 2012 2013 2014 2015 2016 2017

Forecast

Exports

Investment, privatesector


Figure 16Unemployment rate

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2011 2012 2013 2014 2015 2016 2017

Forecast

%



• � The bailout deal agreed with the EC, the ECB and the International Monetary Fund has now been approved by the Cypriot parliament. Some €2b has already been paid out with the remaining €1b of the fi rst tranche expected to be released by the end of June.

• � The deal sees bank depositors with assets above €100,000 facing signifi cant losses and the implementation of an austerity program, in return for €10b of bailout money to keep the country afl oat. The austerity program comprises cuts to public spending and tax hikes, such as raising VAT to 19% by 2014 and corporation tax to 12.5%, as well as privatization of some semi-government organizations.

• � The bailout will come at a very heavy economic cost, with the impact more severe than in Greece following the bailout deal there. We now expect GDP to contract by over 10% in 2013 and by almost 8% in 2014.

Cyprus

Table 5Cyprus (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -2.4 -10.2 -7.8 -2.3 -0.2 2.2

Private consumption -3.0 -11.8 -12.1 -7.0 -4.8 0.4

Fixed investment -23.0 -35.2 -35.1 -7.5 2.2 7.5

Stockbuilding (% of GDP) 0.3 -1.2 -0.6 -0.1 0.5 0.4

Government consumption -1.7 -9.7 -7.3 -4.6 0.5 1.0


Imports of goods and services -7.2 -10.3 -7.1 -1.3 2.0 4.0

Consumer prices 3.1 2.0 1.7 1.2 1.2 1.5


Current account balance (% of GDP) -7.7 -0.9 -0.3 -0.3 -0.3 -0.3



Figure 17Real GDP growth

% year

-12

-10

-8

-6

-4

-2

0

2

4

6

8

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast

Eurozone

Cyprus


Figure 18Government budget balance

€b % of GDP

-8

-6

-4

-2

0

2

4

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Forecast

€b(left-hand side)

% of GDP(right-hand side)



Estonia

• Estonia’s growth is forecast to slow to just under 3% in 2013, although this will still be the fastest growth in the Eurozone. The country is benefi ting from the robust performance of Russia and the Nordic countries and not needing to impose restrictive fi scal policy. Infl ation should also continue to subside, although it should stay above the Eurozone average.

• We expect expansion to accelerate to about 4% in 2014, as domestic demand rebounds and Eurozone growth turns positive. And sound fundamentals, such as a competitive and service-oriented export sector and a liquid and solvent banking system, will help to maintain growth above 4% over the medium term.

• � But the possibility of the economy overheating if capacity constraints left by the deep 2009–11 recession prevent output from meeting rising domestic demand is a downside risk to medium-term growth. And loss of competitiveness or growth that is slower than expected in key trade partners could also weigh on activity.

Table 6Estonia (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 3.2 2.8 4.2 4.2 4.2 4.1



Stockbuilding (% of GDP) -1.9 0.2 0.2 -0.3 -1.7 -3.1




Consumer prices 3.9 3.2 2.8 2.6 2.4 2.3


Current account balance (% of GDP) -1.2 -1.0 -0.8 -0.5 0.0 0.2

Government budget (% of GDP) -0.3 -0.4 0.3 0.2 0.3 0.2



% year

-16

-12

-8

-4

0

4

8

12

16

1994 1997 2000 2003 2006 2009 2012 2015

Forecast

Eurozone

Estonia


Figure 20Infl ation

% year

-5

0

5

10

15

20

25

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast



Table 7Finland (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -0.2 -0.4 1.6 2.3 2.6 2.4




Government consumption 0.8 -0.2 1.1 1.2 1.4 1.6

Exports of goods and services -1.4 -1.0 3.0 3.7 3.8 3.7


Consumer prices 3.2 2.2 1.6 1.5 1.6 1.7





• � The Finnish economy is expected to shrink slightly again in 2013, as subdued foreign demand hits exports and companies’ willingness to invest. Subsequently, we forecast economic growth to recover gradually over the medium term. Weak external demand and austerity measures at home will weigh on the recovery.

• � We still forecast GDP growth of 2.2% a year in 2014–17, which will be a slow recovery compared with the 3.9% pace seen in the decade prior to the global crisis. This is due to the modest performance of exports and to an ongoing process of private sector deleveraging.

• � The Government is expected to miss its defi cit target again this year. Despite higher taxes and a drop in expenditure in real terms, we forecast a budget defi cit of 1.6% of GDP this year, as revenue growth is likely to disappoint on the back of another contraction in GDP.

Finland

Figure 21GDP growth

% year

-10

-8

-6

-4

-2

0

2

4

6

8

1997 2000 2003 2006 2009 2012 2015

Forecast

Eurozone

Finland


Figure 22Exports and external demand

% year

-25

-20

-15

-10

-5

0

5

10

15

20

1997 2000 2003 2006 2009 2012 2015

Exports

Forecast

External demand

1997–2007average



France

• � The shift in policy toward less fi scal austerity and more public investment will help secure a gradual recovery from 2014 onwards. But a number of factors will weigh on economic activity, including high corporate debt and unemployment. Fiscal consolidation will also continue, albeit at a slower pace.

• � We expect GDP to fall 0.3% in 2013, followed by growth of 0.8% in 2014 and 1.3% a year on average in 2015–17.

• � Only limited growth can be expected in the export sector because demand from trade partners is forecast to grow more slowly than in the past decade, at 5.5% a year in 2013–17, compared with 7.2% a year in the decade before the crisis.

• � For those companies that already have robust balance sheets, fi nancing conditions are favorable, with very low interest rates, which should encourage some investment.

Table 8France (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 0.0 -0.3 0.8 1.2 1.3 1.4



Stockbuilding (% of GDP) -0.2 -0.3 -0.1 0.2 0.4 0.4


Exports of goods and services 2.5 -0.2 2.6 4.0 4.3 4.5


Consumer prices 2.2 1.2 1.6 1.5 1.4 1.4





Figure 23GDP growth: France vs. rest of Eurozone

Forecast

Other Eurozone

France

-8

-6

-4

-2

0

2

4

6

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% year



Forecast

7

8

9

10

11

12

1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

%



Germany

• Weaker growth than previously expected in emerging markets and stiffer competition from the depreciating Japanese yen are hitting Germany’s exports and GDP. We now forecast GDP growth at just 0.3% in 2013. But strong fundamentals mean that Germany will remain one of the better-performing Eurozone economies.

• With low debt and favorable fi nancing conditions, German companies are well placed to take advantage of the expected global recovery in 2014. We continue to expect a solid economic recovery from 2014. GDP growth is forecast at 1.6% in 2014 and 1.6% a year in 2015–17.

• �Easier fi scal policy would be the single most effective measure to foster growth in Germany and the Eurozone.

Table 9Germany (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 0.8 0.3 1.6 1.7 1.6 1.5



Stockbuilding (% of GDP) 0.2 0.0 0.0 -0.1 -0.2 -0.4




Consumer prices 2.1 1.5 1.6 1.7 1.7 1.7



Government budget (% of GDP) -0.1 0.0 0.0 0.0 0.0 0.0


Figure 25GDP

% year % quarter

GDP % year(left-hand side)

GDP % quarter(left-hand side)

Forecast

-5

-4

-3

-2

-1

0

1

2

-10

-8

-6

-4

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

3


Figure 26Non-fi nancial corporate debt

Forecast

78

82

86

90

94

98

102

106

1990 1994 1998 2002 2006 2010 2014

% GDP



Greece

• � GDP shrank more than 20% in the fi ve years to 2012 and is expected to drop a further 5.5% in 2013, driven by fi scal austerity and surging unemployment. Growth is expected to resume in H2 2014, as fi scal policy gradually eases and the acceleration of global growth results in a rebound of exports. We expect GDP growth to average 1.5%–2% in 2015–17.

• Fiscal tightening — estimated at around 6% of GDP in 2013–17 — will continue to be the main drag on growth in the short to medium term. However, the odds of Greece abandoning the Eurozone have shrunk markedly, partly because of the perceived stronger commitment of the Eurozone authorities to preserve the monetary union.

• � Downside risks are still signifi cant, as the effects of austerity may continue to surprise policy-makers on the downside and fi scal fatigue may surface. As a result, the policy focus should now shift to the delayed structural reforms.

Table 10Greece (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -6.4 -5.5 -0.3 1.5 2.0 1.9

Private consumption -9.1 -7.6 -1.4 0.6 1.7 1.9



Government consumption -4.3 -8.2 -3.8 -0.4 1.7 1.7

Exports of goods and services -2.1 -1.7 5.3 5.0 3.4 3.5


Consumer prices 1.0 -0.2 0.0 0.4 0.8 1.4





Figure 27Contributions to GDP growth

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Forecast

GDP

Net exports

Domestic demand

% year



Forecast

0

5

10

15

20

25

30

35

2002 2004 2006 2008 2010 2012 2014 2016

%



Ireland

• The Irish economy grew by 0.9% in 2012, outpacing most other Eurozone countries. We expect the economy to continue expanding in the coming months, but this is likely to be driven entirely by net trade.

• The domestic economy remains in the doldrums: high unemployment and weak real income growth will restrict consumer spending. Meanwhile, a depressed housing market and tight credit conditions suggest that the prospects for investment are also bleak.

• But a more broad-based recovery is expected to take hold in the medium term as the Government’s fi scal and structural reforms start to bear fruit. We expect GDP growth to accelerate from 2.2% in 2014 to an average of 3% a year in 2015–17.

• Downside risks, stemming from the possibility of a global environment that is weaker than expected and a shakeout in Ireland’s housing market, are dominating the outlook.

Table 11Ireland (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 0.9 0.8 2.2 2.6 3.0 3.4


Fixed investment 1.1 -3.4 4.9 4.9 4.9 5.7

Stockbuilding (% of GDP) -0.1 0.0 0.0 0.1 0.2 0.0

Government consumption -3.8 -2.7 -1.3 -1.1 -0.7 0.1



Consumer prices 1.9 1.0 1.7 1.9 1.7 1.6





Figure 29Contributions to GDP

-12

-9

-6

-3

0

3

6

9

12

15

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Domestic demand

GDPForecast

Net exports

% year


Figure 30Consumption and investment

-40

-30

-20

-10

0

10

20

30

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Consumption

ForecastInvestment

% year



• We forecast that GDP will drop 1.8% in 2013, weighed down by tight credit conditions, depressed domestic demand and slower growth in export markets. Growth will resume gradually from 2014, but is expected to remain modest, at 0.4% in 2014 and just above 1% on average in 2015–17.

• A two-month political stalemate was resolved with the formation of a left-right coalition led by Prime Minister Enrico Letta, deputy-secretary of the Democratic Party. The new Government promises to curb austerity and push through growth-boosting measures. Lower interest rates will create some room for maneuver, but fi scal discipline needs to be maintained as market sentiment remains volatile.

• The new Government is expected to continue the process of reform initiated by the Monti administration. In addition, the structure of the current coalition may make it easier to build a consensus for reform. This could represent an opportunity to address the well-recognized structural weaknesses of the Italian economy.

Italy

Table 12Italy (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -2.4 -1.8 0.4 1.2 1.3 1.3



Stockbuilding (% of GDP) -0.6 -1.2 -0.7 -0.3 0.1 0.1




Consumer prices 3.3 1.8 1.8 1.2 1.2 1.3


Current account balance (% of GDP) -0.7 0.2 0.3 0.1 -0.2 -0.4



Figure 31Government bond yields and spreads

Percentage points

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012

10-year government bond yields

Spread over German bunds



% of GDP

60

70

80

90

100

110

120

130

140

-12

-10

-8

-6

-4

-2

0

1987 1991 1995 1999 2003 2007 2011 2015 2019

Forecast

Debt position(right-hand side)

Government budget(left-hand side)

% of GDP



• � We continue to forecast relatively strong growth of just over 1% this year and an acceleration to about 3% in 2014, provided that the Eurozone continues to stabilize gradually. Growth should also be helped by the recovery of the fi nancial markets leading the real economy.

• � The forecast is largely unchanged from our March report, as the strong end to 2012 (largely due to one-off factors) is not indicative of an improvement of any underlying momentum and will be offset by a now-weaker export outlook.

• � Faced by rising unemployment and the impact of the 2013 budget, household spending will remain subdued, especially against the background of already low confi dence. Easing infl ation will be a mitigating factor, but not suffi cient to offset these headwinds fully.

Luxembourg

Table 13Luxembourg (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 0.3 1.1 3.2 3.4 3.0 2.8





Exports of goods and services -2.5 3.0 6.0 5.6 4.4 3.5


Consumer prices 2.9 2.0 2.0 2.0 2.0 2.0



Government budget (% of GDP) -0.8 -1.2 -0.8 -0.5 -0.2 0.5


Figure 33Real GDP and employment

-10

-5

0

5

10

15

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast

Employment

GDP

% year


Figure 34Systemic stress indicator

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1999 2001 2003 2005 2007 2009 2011 2013

%

Source: ECB, Haver Analytics.


• � Both domestic and external conditions support ongoing growth in Malta, albeit at slower rates than those achieved before the crisis. We expect GDP growth of 1.3% in 2013 and 2014, followed by 1.7% a year on average in 2015–17. This is little changed from our March forecast.

• � The budget defi cit is likely to be signifi cantly higher than planned by the Government. But with the EC now willing to relax fi scal targets, this should not trigger additional fi scal consolidation measures.

• � While the size of the fi nancial sector remains a source of risk, rating agencies have been quick to recognize the differences between Malta and Cyprus. This makes it unlikely that a banking crisis comparable to Cyprus’ could occur, or that similarly unaffordable fi scal costs could be imposed.

• The main economic challenge is to ensure that growing sectors, such as tourism and fi nancial services, remain competitive. This will require further investment, both from domestic and foreign sources.

Malta

Table 14Malta (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 1.2 1.3 1.3 1.6 1.7 1.8

Private consumption -1.1 1.0 1.3 1.4 1.5 1.6


Stockbuilding (% of GDP) -2.8 -2.1 -2.1 -2.0 -1.7 -1.4




Consumer prices 3.2 1.7 1.7 1.8 2.0 2.3





Figure 35Real GDP

-3

-2

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016

Forecast

% year


Figure 36Fiscal balance vs. Eurozone

Forecast

-10

-8

-6

-4

-2

0

2

2003 2005 2007 2009 2011 2013 2015 2017

Malta

Eurozone

% of GDP



• � A weak domestic economy is keeping the Netherlands in recession, despite an improved contribution from the external sector. The weakness of the domestic economy has both short- and longer-term origins. In the short term it has been suffering from a chronic lack of demand, caused by a severe and prolonged squeeze on household spending power and an overly aggressive austerity program.

• � These headwinds should begin to ease as we move through this year and into 2014, with real incomes set to stabilize and the pace of austerity due to decline substantially. Our forecast shows GDP falling by 1% this year, before a weak recovery yields growth of 0.7% in 2014.

• � Beyond 2014, growth prospects will be constrained by the need to deal with serious structural problems in the household and banking sectors. We expect this to limit GDP growth to just 1.2% a year in 2015–17.

Netherlands

Table 15Netherlands (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -1.0 -1.0 0.7 1.0 1.2 1.4




Government consumption 0.0 -0.1 -0.3 -0.3 -0.1 0.5



Consumer prices 2.8 2.6 1.4 1.3 1.1 1.1





Figure 37Misery Index*

Percentage points

5

6

7

8

9

10

11

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Haver Analytics.

Figure 38Household debt-to-income ratio

Forecast

50

100

150

200

250

300

1992 1995 1998 2001 2004 2007 2010 2013 2016

%



• � With the restructuring of the economy still in progress, we forecast another sharp contraction in economic activity in 2013. GDP is set to decline 2.8%, followed by growth of just 0.3% in 2014 and weak expansion of a little over 1% a year in 2015–17.

• � Our growth forecast is lower than the Government’s for two main reasons. First, developments in 2011 and 2012 throughout the Eurozone have shown that fi scal consolidation measures have had a larger impact on growth than the Government currently estimates. Second, the global environment is relatively muted, especially in the short term, limiting opportunities to take advantage of improved competitiveness via rising exports.

• � Exports are forecast to be the only source of growth in the short term, due to ongoing reforms to restore competitiveness. Exports are expected to pick up in 2014, when demand from Portugal’s main trade partners starts to improve.

Portugal

Table 16Portugal (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -3.3 -2.8 0.3 1.1 1.1 1.1


Fixed investment -14.5 -8.4 -1.6 2.1 2.4 2.3

Stockbuilding (% of GDP) 0.1 -0.6 -0.5 -0.5 -0.7 -0.9




Consumer prices 2.8 0.2 0.8 0.8 0.8 0.9


Current account balance (% of GDP) -1.5 -0.9 0.2 0.2 0.2 0.2




2014-8

-6

-4

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011

GDP

Net exports

Domestic demand

Forecast

% year


Figure 40Current account balance

US$b % of GDP


Forecast

-21

-18

-15

-12

-9

-6

-3

0

3

6

9

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

1992 1995 1998 2001 2004 2007 2010 2013 2016

US$b (left-hand side)



Slovakia

• � The weaker global and Eurozone outlook is taking its toll on Slovakia. We have lowered our forecast for GDP growth in the short term and expect only 1% this year.

• � However, unlike in many other Eurozone countries, neither the public nor the private sector needs to reduce debt. This means that, once the global and Eurozone economies pick up, robust growth should resume. We forecast GDP growth at 2.4% in 2014 and about 3.6% a year on average in 2015–17.

• � Fiscal consolidation will weigh on growth in the short term, in particular in 2013, when most of the fi scal effort is planned. Low debt levels and favorable fi nancing conditions mean that companies in Slovakia are well placed to take advantage of the global recovery from 2014.

• � One concern is high structural unemployment. Labor reforms, such as policies encouraging higher labor force participation, should be implemented to ensure robust growth in the medium term.

Table 17Slovakia (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP 2.0 1.0 2.4 3.7 3.7 3.5


Fixed investment -3.7 0.7 2.5 4.1 4.9 4.5

Stockbuilding (% of GDP) -2.3 -1.9 -1.2 -0.8 -0.1 0.0

Government consumption -0.6 -0.4 1.6 3.5 2.9 2.7



Consumer prices 3.6 2.0 2.2 2.1 2.1 2.1






-6

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Slovakia

Forecast

Eurozone

% year


Figure 42Private consumption and total fi xed investment

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Forecast

Consumption, private

% year



Slovenia

• � Following the package agreed for Cyprus, fears rose that Slovenia might be the next country to require a bailout. But we believe the country should be able to avoid an EU loan. The successful bond auctions of recent weeks suggest international investors now share this view.

• �Market concerns center on the troubled banking sector and the likely spillover to the public fi nances and the wider economy. The recapitalization needs of the three largest banks have been estimated by the regulatory authority at €1b in 2013 (around 3% of GDP).

• � Deleveraging in the public and private sectors will signifi cantly dampen economic activity this year, amid tight fi nancial conditions, rising unemployment and lackluster exports due to weak Eurozone demand. We expect the economy to contract by nearly 5% in 2013, and then by almost 3% in 2014.

• � However, downside risks remain high, with continued market access likely to hinge on the Government’s ability to retain investor confi dence by implementing plans to restructure the fi nancial sector effi ciently.

Table 18Slovenia (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -2.2 -4.9 -2.9 1.1 2.8 3.4



Stockbuilding (% of GDP) -0.3 0.2 2.0 1.5 -0.1 -0.7


Exports of goods and services 1.3 -2.5 -1.7 0.7 2.0 2.5


Consumer prices 2.6 2.4 2.0 2.1 2.2 2.5






Forecast

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Slovenia

Eurozone

% year


Figure 44Government budget balance

-12

-10

-8

-6

-4

-2

0

1995 1998 2001 2004 2007 2010 2013 2016-3.6

-3.0

-2.4

-1.8

-1.2

-0.6

0.0

€b % of GDP


Forecast

€b(left-hand side)

0.6 2



Spain

• � The pace of fi scal consolidation is easing and competitiveness improvements mean that Spain is well placed to take advantage of the upturn forecast in global trade over the next year. We believe this will help the Spanish economy to return to positive growth in 2014.

• � But in the near term, the economy continues to face signifi cant headwinds. Activity proved slightly weaker than expected in the early months of 2013 and we are now rather less positive about the outlook for global trade for the rest of this year. As a result, we expect Spanish GDP to shrink by 1.7% in 2013, a slight downgrade from our March 2013 forecast.

• � There is also a risk that the recent improvement in fi nancial market conditions could engender complacency among policy-makers, as it removes the pressure to pursue reforms. Indeed, the reform agenda has slowed this year, which may represent a lost opportunity to boost the economy’s longer-term growth potential.

Table 19Spain (annual percentage changes unless specifi ed) Source: Oxford Economics.

2012 2013 2014 2015 2016 2017

GDP -1.4 -1.7 0.2 1.1 1.4 2.0




Government consumption -3.7 -4.1 -3.3 -1.0 -0.3 0.7



Consumer prices 2.4 1.8 1.0 0.9 1.0 1.0


Current account balance (% of GDP) -1.1 0.7 0.6 0.6 0.6 0.5




% of GDP

0

20

40

60

80

100

120

1992 1995 1998 2001 2004 2007 2010 2013 2016-12

-10

-8

-6

-4

-2

0

2

4

Government debt(right-hand side)

Forecast

Government budget balance(left-hand side)

% of GDP



-8

-6

-4

-2

0

2

4

6

8

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Forecast

GDP

Net exports

Domesticdemand

% year


37Ernst & Young Eurozone Forecast June 2013 37Ernst & Young Eurozone Forecast June 2013


Detailed tables and charts


Forecast assumptions

2012 2013 2014 2015 2016 2017

Short-term interest rates (%) 0.6 0.2 0.3 0.3 0.3 0.6

Long-term interest rates (%) 4.0 2.9 3.0 3.3 3.7 4.0

Euro effective exchange rate (1995 = 100) 115.5 118.5 115.6 112.0 111.1 110.9

Oil prices (€/barrel) 86.9 81.5 89.1 96.5 99.4 102.8

Share prices (% year) -4.1 8.4 8.0 8.6 7.8 6.6

2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Short-term interest rates (%) 1.0 0.7 0.4 0.2 0.2 0.2 0.2 0.2

Long-term interest rates (%) 4.4 4.3 4.0 3.4 3.2 2.8 2.8 2.9

Euro effective exchange rate (1995 = 100) 116.9 115.9 113.4 115.9 118.8 118.6 118.7 117.9

Oil prices (€/barrel) 90.3 84.6 87.7 85.1 85.2 79.9 79.6 81.3

Share prices (% year) -14.9 -20.5 12.6 13.8 5.9 16.7 8.8 3.1


Eurozone GDP and components

Annual levels — real terms(€b, 2000 prices)

2012 2013 2014 2015 2016 2017

GDP 8,550 8,496 8,576 8,698 8,830 8,972

Private consumption 4,794 4,754 4,779 4,831 4,894 4,967

Fixed investment 1,560 1,522 1,553 1,597 1,641 1,683

Government consumption 1,829 1,822 1,816 1,822 1,833 1,848

Stockbuilding -4 -17 -13 -5 0 -3

Exports of goods and services 3,877 3,917 4,048 4,218 4,392 4,563

Imports of goods and services 3,505 3,502 3,607 3,765 3,930 4,085

Annual levels — nominal terms(€b)

2012 2013 2014 2015 2016 2017

GDP 9,489 9,552 9,772 10,055 10,360 10,687

Private consumption 5,449 5,482 5,592 5,733 5,891 6,066

Fixed investment 1,752 1,728 1,785 1,862 1,942 2,022

Government consumption 2,040 2,053 2,073 2,111 2,156 2,210

Stockbuilding -6 -36 -7 30 52 59

Exports of goods and services 4,329 4,414 4,641 4,922 5,210 5,503

Imports of goods and services 4,074 4,088 4,312 4,602 4,890 5,174

Quarterly forecast (quarterly percentage changes)

2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

GDP -0.1 -0.2 -0.1 -0.6 -0.2 0.0 0.1 0.2

Private consumption -0.2 -0.5 -0.2 -0.5 -0.2 -0.1 0.1 0.1

Fixed investment -1.4 -1.6 -0.8 -1.2 -0.8 -0.1 0.2 0.4

Government consumption -0.1 -0.3 -0.1 0.1 -0.1 -0.2 -0.2 -0.2

Exports of goods and services 0.5 1.7 0.9 -0.8 -0.1 0.5 0.6 0.8

Imports of goods and services -0.4 0.6 0.1 -0.9 -0.2 0.3 0.4 0.6

Contributions to GDP growth (percentage point contribution to quarter-on-quarter GDP growth)

2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

GDP -0.1 -0.2 -0.1 -0.6 -0.2 0.0 0.1 0.2

Private consumption -0.1 -0.3 -0.1 -0.3 -0.1 -0.1 0.0 0.1

Fixed investment -0.3 -0.3 -0.1 -0.2 -0.1 0.0 0.0 0.1

Government consumption 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0

Stockbuilding -0.1 0.0 -0.2 -0.1 0.1 0.0 0.0 0.0

Exports of goods and services 0.2 0.7 0.4 -0.4 -0.1 0.2 0.3 0.4

Imports of goods and services 0.2 -0.3 0.0 0.4 0.1 -0.1 -0.2 -0.3


Prices and cost indicators(annual percentage changes unless specifi ed)

2012 2013 2014 2015 2016 2017

HICP headline infl ation 2.5 1.6 1.5 1.4 1.4 1.4

Infl ation ex-energy 1.8 1.5 1.5 1.3 1.3 1.4

GDP defl ator 1.3 1.3 1.4 1.4 1.5 1.5

Import defl ator 4.1 1.1 1.7 1.8 1.7 1.7

Export defl ator 5.0 0.4 2.6 2.4 1.8 1.8

Terms of trade 1.0 -0.7 0.9 0.6 0.1 0.1

Earnings 1.7 1.1 1.6 2.0 2.3 2.5

Unit labor costs 1.7 0.5 0.5 0.8 1.0 1.2

Output gap (% of GDP) -3.0 -4.4 -4.3 -3.9 -3.5 -3.1

Oil prices (€ per barrel) 86.9 81.5 89.1 96.5 99.4 102.8

Euro effective exchange rate (1995 = 100) 115.5 118.5 115.6 112.0 111.1 110.9

2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

HICP headline infl ation 2.7 2.5 2.5 2.3 1.9 1.4 1.5 1.5

Infl ation ex-energy 1.9 1.8 1.8 1.6 1.5 1.3 1.6 1.5

GDP defl ator 1.3 1.3 1.3 1.3 1.4 1.3 1.2 1.3

Import defl ator 4.0 4.5 4.5 3.3 1.4 1.1 0.6 1.2

Export defl ator 5.7 4.8 6.1 3.5 0.4 0.5 -0.5 1.3

Terms of trade 1.7 0.4 1.6 0.2 -1.1 -0.6 -1.2 0.1

Earnings 2.0 1.8 1.7 1.3 1.0 1.0 1.1 1.3

Unit labor costs 1.6 1.6 2.0 1.6 1.0 0.6 0.4 0.0

Output gap (% of GDP) -2.5 -2.7 -3.0 -3.8 -4.2 -4.4 -4.5 -4.4

Oil prices (€ per barrel) 90.3 84.6 87.7 85.1 85.2 79.9 79.6 81.3

Euro effective exchange rate (1995 = 100) 116.9 115.9 113.4 115.9 118.8 118.6 118.7 117.9

Note: HICP is the European Harmonized Index of Consumer Prices.


Labor market indicators(annual percentage changes unless specifi ed)

2012 2013 2014 2015 2016 2017

Employment -0.6 -1.2 -0.2 0.2 0.3 0.3

Unemployment rate (%) 11.4 12.4 12.7 12.4 12.0 11.6

NAIRU (%) 8.2 8.6 8.7 8.6 8.5 8.4

Participation rate (%) 75.0 75.3 75.5 75.7 75.9 76.0

Earnings 1.7 1.1 1.6 2.0 2.3 2.5

Unit labor costs 1.7 0.5 0.5 0.8 1.0 1.2

2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Employment -0.4 -0.7 -0.6 -0.7 -1.1 -1.3 -1.4 -1.1

Unemployment rate (%) 10.9 11.3 11.5 11.8 12.0 12.4 12.5 12.7

NAIRU (%) 8.1 8.2 8.3 8.4 8.5 8.6 8.6 8.7

Participation rate (%) 74.6 74.9 75.1 75.2 75.1 75.3 75.3 75.4

Earnings 2.0 1.8 1.7 1.3 1.0 1.0 1.1 1.3

Unit labor costs 1.6 1.6 2.0 1.6 1.0 0.6 0.4 0.0

Note: NAIRU is the Non-Accelerating Infl ation Rate of Unemployment, i.e., the rate of unemployment below which infl ationary pressures would start to appear due to labor market tightness.

Current account and fi scal balance

2012 2013 2014 2015 2016 2017

Trade balance (€b) 80.1 138.4 144.6 136.3 136.6 145.0

Trade balance (% of GDP) 0.9 1.6 1.7 1.6 1.5 1.6

Current account balance (€b) 121.8 159.3 150.2 136.2 136.0 140.7


Government budget balance (€b) -352 -272 -235 -188 -152 -124

Government budget balance (% of GDP) -3.7 -2.8 -2.4 -1.9 -1.5 -1.2

Cyclically adjusted surplus (+)/defi cit (-) (% of GDP) -3.3 -2.3 -1.9 -1.3 -0.9 -0.6

Government debt (€b) 8,795 9,149 9,529 9,894 10,210 10,487


Measures of convergence and divergence within the Eurozone

2003–07 2008–12 2013–17

Growth and incomes

Standard deviation of GDP growth rates 2.0 2.3 1.8

Growth rate gap (max-min) 7.1 9.4 6.8

Highest GDP per capita (Eurozone = 100) 241.6 239.0 242.2

Lowest GDP per capita (Eurozone = 100) 56.2 67.8 65.8

Infl ation and prices

Standard deviation of infl ation rates 1.2 1.0 0.6

Infl ation rate gap (max-min) 4.8 3.9 2.3

Highest price level (Eurozone = 100) 122.2 121.1 120.1

Lowest price level (Eurozone = 100) 55.6 69.1 71.7


Cross-country tables

Real GDP(% year)

Rank 2012 2013 2014 2015 2016 2017 Average2013–17

1 Estonia 3.2 2.8 4.2 4.2 4.2 4.1 3.9

2 Slovakia 2.0 1.0 2.4 3.7 3.7 3.5 2.9

3 Luxembourg 0.3 1.1 3.2 3.4 3.0 2.8 2.7

4 Ireland 0.9 0.8 2.2 2.6 3.0 3.4 2.4

5 Finland -0.2 -0.4 1.6 2.3 2.6 2.4 1.7

6 Malta 1.2 1.3 1.3 1.6 1.7 1.8 1.5

7 Austria 0.8 0.7 1.8 1.5 1.6 1.5 1.4

8 Germany 0.8 0.3 1.6 1.7 1.6 1.5 1.3

9 Eurozone -0.5 -0.6 0.9 1.4 1.5 1.6 1.0

10 Belgium -0.2 -0.4 0.7 1.2 1.4 1.7 0.9

11 France 0.0 -0.3 0.8 1.2 1.3 1.4 0.9

12 Netherlands -1.0 -1.0 0.7 1.0 1.2 1.4 0.7

13 Spain -1.4 -1.7 0.2 1.1 1.4 2.0 0.6

14 Italy -2.4 -1.8 0.4 1.2 1.3 1.3 0.5

15 Portugal -3.3 -2.8 0.3 1.1 1.1 1.1 0.1

16 Greece -6.4 -5.5 -0.3 1.5 2.0 1.9 -0.1

17 Slovenia -2.2 -4.9 -2.9 1.1 2.8 3.4 -0.2

18 Cyprus -2.4 -10.2 -7.8 -2.3 -0.2 2.2 -3.8

Infl ation rates(% year)

Rank 2012 2013 2014 2015 2016 2017 Average2013–17

1 Greece 1.0 -0.2 0.0 0.4 0.8 1.4 0.5

2 Portugal 2.8 0.2 0.8 0.8 0.8 0.9 0.7

3 Spain 2.4 1.8 1.0 0.9 1.0 1.0 1.1

4 France 2.2 1.2 1.6 1.5 1.4 1.4 1.4

5 Eurozone 2.5 1.6 1.5 1.4 1.4 1.4 1.5

6 Italy 3.3 1.8 1.8 1.2 1.2 1.3 1.5

7 Netherlands 2.8 2.6 1.4 1.3 1.1 1.1 1.5

8 Cyprus 3.1 2.0 1.7 1.2 1.2 1.5 1.5

9 Ireland 1.9 1.0 1.7 1.9 1.7 1.6 1.6

10 Germany 2.1 1.5 1.6 1.7 1.7 1.7 1.7

11 Finland 3.2 2.2 1.6 1.5 1.6 1.7 1.7

12 Austria 2.6 2.2 1.8 1.8 1.8 1.8 1.9

13 Malta 3.2 1.7 1.7 1.8 2.0 2.3 1.9

14 Belgium 2.6 1.5 2.1 2.2 2.0 2.0 2.0

15 Luxembourg 2.9 2.0 2.0 2.0 2.0 2.0 2.0

16 Slovakia 3.6 2.0 2.2 2.1 2.1 2.1 2.1

17 Slovenia 2.6 2.4 2.0 2.1 2.2 2.5 2.2

18 Estonia 3.9 3.2 2.8 2.6 2.4 2.3 2.7


Unemployment rate(% of labor force)

Rank 2012 2013 2014 2015 2016 2017 Average2013–17

1 Austria 4.4 5.1 5.0 4.6 4.5 4.5 4.8

2 Luxembourg 5.1 5.8 5.8 5.3 4.8 4.3 5.2

3 Germany 5.5 5.5 5.5 5.3 5.0 4.9 5.2

4 Malta 6.4 6.7 6.3 6.0 5.7 5.5 6.1

5 Netherlands 5.3 6.8 7.2 7.1 7.0 7.0 7.0

6 Finland 7.7 8.2 7.9 7.4 7.1 6.8 7.5

7 Estonia 10.1 9.0 8.3 7.6 7.0 6.5 7.7

8 Belgium 7.6 8.4 8.6 8.3 7.8 7.6 8.1

9 France 10.3 11.3 11.5 11.4 11.2 11.0 11.3

10 Italy 10.6 12.1 12.7 12.4 11.9 11.4 12.1

11 Eurozone 11.4 12.4 12.7 12.4 12.0 11.6 12.2

12 Ireland 14.7 14.0 13.7 13.3 12.4 11.4 13.0

13 Slovakia 14.0 14.6 14.2 13.3 12.3 11.2 13.1

14 Slovenia 9.0 13.9 14.0 14.0 13.1 12.0 13.4

15 Portugal 15.9 17.9 18.2 17.5 16.5 15.5 17.1

16 Cyprus 12.1 19.1 24.1 25.3 25.0 22.1 23.1

17 Spain 25.1 27.2 27.6 27.1 26.4 25.5 26.7

18 Greece 24.3 28.3 29.1 28.3 27.2 26.1 27.8

Government budget(% of GDP)

Rank 2012 2013 2014 2015 2016 2017 Difference 2013–17

1 Germany -0.1 0.0 0.0 0.0 0.0 0.0 0.0

2 Estonia -0.3 -0.4 0.3 0.2 0.3 0.2 0.6

3 Slovakia -4.3 -2.3 -1.9 -1.8 -1.5 -1.2 1.1

4 Italy -3.0 -3.0 -2.7 -2.2 -1.9 -1.7 1.3

5 Malta -3.3 -3.7 -3.4 -3.0 -2.6 -2.3 1.4

6 Netherlands -4.0 -3.4 -3.4 -2.7 -2.4 -2.0 1.4

7 Finland -1.9 -1.6 -1.2 -0.5 -0.2 -0.1 1.5

8 Eurozone -3.7 -2.8 -2.4 -1.9 -1.5 -1.2 1.6

9 Austria -2.5 -2.5 -1.7 -1.2 -0.9 -0.8 1.7

10 Luxembourg -0.8 -1.2 -0.8 -0.5 -0.2 0.5 1.7

11 Belgium -3.9 -3.1 -2.0 -1.4 -1.1 -0.9 2.2

12 France -4.8 -3.9 -3.3 -2.6 -2.1 -1.7 2.2

13 Cyprus -4.9 -6.0 -6.9 -5.8 -4.2 -3.4 2.6

14 Greece -10.0 -6.7 -5.6 -4.5 -3.7 -3.2 3.5

15 Spain -10.6 -6.4 -5.8 -4.5 -3.2 -2.3 4.1

16 Portugal -6.4 -6.0 -4.2 -2.9 -1.7 -0.8 5.2

17 Ireland -7.5 -7.4 -4.7 -2.9 -1.9 -1.2 6.2

18 Slovenia -4.0 -9.6 -4.4 -3.7 -3.9 -2.0 7.6

Cross-country tables

Follow the Eurozone’s progress onlinePlease visit www.ey.com/eurozone to:• View video footage of macroeconomists and Ernst & Young

professionals discussing the future of the Eurozone and its impact on businesses

• Use our dynamic Eurochart to compare country data over a fi ve-year period

• Download and print the Ernst & Young Eurozone Forecast and forecasts for the 17 member states

Or follow our ongoing commentary on Twitter at http://twitter.com/EY_Eurozone

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2013 EYGM Limited. All Rights Reserved.

EYG no. AU1691

In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

ED None

EMEIA Marketing Agency1000059

About Oxford Economics

Oxford Economics was founded in 1981 to provide independent forecasting and analysis tailored to the needs of economists and planners in government and business. It is now one of the world’s leading providers of economic analysis, advice and models, with over 300 clients including international organizations, government departments and central banks around the world, and a large number of multinational blue-chip companies across the whole industrial spectrum.

Oxford Economics commands a high degree of professional and technical expertise, both in its own staff of over 70 professionals based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York and Philadelphia, and through its close links with Oxford University and a range of partner institutions in Europe and the US. Oxford Economics’ services include forecasting for 190 countries, 85 sectors and over 2,500 cities and sub-regions in Europe and Asia; economic impact assessments; policy analysis; and work on the economics of energy and sustainability.

The forecasts presented in this report are based on information obtained from public sources that we consider to be reliable but we assume no liability for their completeness or accuracy. The analysis presented in this report is for information purposes only and Oxford Economics does not warrant that its forecasts, projections, advice and/or recommendations will be accurate or achievable. Oxford Economics will not be liable for the contents of any of the foregoing or for the reliance by readers on any of the foregoing.